US retail data is coming, Asmei and TSMC performance will be announced! How will interest rate cut expectations and "AI faith" unfold this week?

According to the financial news app Zhitong Finance, the highly anticipated "terrifying data" of US retail sales will make a major impact this week. The latest retail data is crucial for the escalating or unexpected cooling of the Fed's interest rate cut expectations. The Q2 financial reports of the "king of chip manufacturing" TSMC (TSM.US) and the crucial lithography machine giant ASML (ASML.US) will also be released this week. Along with these two chip giants, the financial reports of the streaming giant Netflix (NFLX.US) are set to be announced, marking the peak of the Q2 earnings season for US stocks starting this week.

For the US stock market, and even global stock markets, two core trading themes are of utmost importance - the "Fed interest rate cut expectations" and the "AI faith" of tech stock investors. If the related data meets or exceeds expectations, these two core themes are expected to drive global stock markets into a phase of festive celebration.

As the epic investment frenzy surrounding artificial intelligence continues to dominate Wall Street and global stock markets, investors will closely watch the performance data and earnings conference calls of ASML and TSMC scheduled for Wednesday and Thursday respectively. Netflix, the streaming giant, will be the first major tech company to report quarterly earnings for the current reporting period, with the company focused on film and television streaming set to announce its earnings after the US stock market closes on Thursday.

Top Wall Street investment banks such as Goldman Sachs (GS.US), Morgan Stanley (MS.US), and Bank of America (BAC.US) will also release their financial reports this week. Johnson & Johnson (JNJ.US), a Dow Jones index component company known as the "barometer of US blue-chip stocks", as well as American Express (AXP.US), UnitedHealth (UNH.US), and other companies will also announce their financial results, which are crucial for the financial and consumer sectors of the US stock market.

In addition, the theme of US politics will also be one of the most concerning topics for investors, as former US President Donald Trump narrowly escaped an assassination attempt during a campaign rally in Pennsylvania on Saturday. Global business leaders quickly reacted to the events of the day, condemning political violence and praising the courage of the former US president in the face of danger.

In the financial markets, investors widely believe that the attack on Trump may become one of the most important turning points in the US election, strengthening Trump's political leadership image overall. Especially in the minds of his supporters, he is seen as one of America's historical heroes, with some even comparing him to Roosevelt. In contrast, weaknesses in the impromptu reactions, speech logic, and internal support rates of current President Biden from the Democratic Party are more pronounced.

Tesla CEO Musk made several posts on social media platform X over the weekend in response to the Trump shooting incident, fully supporting Trump's campaign for US president. In Musk's first social media post, where he has long kept his election preferences undisclosed, Musk stated that he will wholeheartedly support Trump and hopes for his speedy recovery. Musk's strong support for Trump has garnered strong backing from many Musk fans and Tesla enthusiasts At the same time, this event may exacerbate the two-party political standoff in the United States, prompting Republican candidates to closely support Trump, and this event may favor the Republicans in the congressional elections in the United States. Stock market investors may hold relatively optimistic expectations for a unified government after Trump's victory, believing that this will be beneficial for the smooth implementation of pro-business policies planned by the Trump administration and financial market stability.

It is understood that the Republican National Convention is scheduled to be held in Milwaukee this week, where Trump will be formally nominated as the Republican presidential candidate.

Market Awaits Stronger US Retail Data to Reinforce Rate Cut Expectations

Compared to the beginning of July, the number of heavyweight economic data to be released this week has significantly decreased, with the highlight being the June retail sales report to be released on Tuesday Eastern Time. Following unexpected slowdowns in the US labor market and consumer spending in May, investors and Fed observers will closely watch these data to look for significant signs of further weakness in US consumer spending. Weaker-than-expected consumer spending will continue to boost the strong rate cut expectations in the current financial markets.

As about 70%-80% of the US GDP is driven by consumer spending, US retail sales data plays an important guiding role for investors to assess the current situation and prospects of the US economy. The reason why this data is referred to as "scary data" by the market is mainly because consumer spending represented by this data is crucial for macroeconomic expectations, and its release can easily cause drastic fluctuations in financial markets including the stock and bond markets.

Recent sentiments related to broad-based inflation decline and a soft labor market trend have been fully reflected in the US Treasury market, with interest rate traders having a clearer view on the Fed's rate cut path, rather than the significant divergences in rate cut path judgments seen for most of this year. With the latest economic data widely seen by economists as supporting the view that the Fed will cut rates twice in September and December, and even in the view of some strategists, a rate cut announcement in November is also possible, US Treasury yields across all maturities have declined.

Interest rate swap trading shows that following the release of the latest CPI and weak consumer confidence index, interest rate traders have almost fully priced in the expectation of a 25 basis point rate cut announcement by the Fed in September, and have almost completely priced in the expectation of a rate cut in December, with the probability of a rate cut in November continuously increasing. On Friday, economists from Barclays Bank adjusted their forecasts for Fed policy, expecting a second rate cut in December following the announcement of a rate cut in September. The research team at the Oxford Economics Institute expects a month-on-month decline of 0.4% in US retail sales in June, despite this overall decline being driven by a significant drop in gasoline prices. The team wrote in a report on Friday, "We expect that excluding volatile items such as energy, controlled group sales will steadily increase by 0.3%, which will translate into a recovery trend in actual consumption for the second quarter with the price decline in June."

"However, overall, the US consumer situation remains robust, thanks to a labor market that is cooling rather than collapsing instantly, and the strong condition of household balance sheets," the research team wrote in the report.

The inflation data released last Thursday caused a dramatic change in the US stock market, with all stocks (mainly the "Big Seven Tech Giants" in the US stock market) that have outperformed the S&P 500 index since 2023 facing intense selling pressure. On the other hand, stocks that have been heavily abandoned since the Fed's interest rate hike cycle, especially small and medium-cap stocks in the US stock market, benefited from the rising expectations of a Fed rate cut and rose significantly. Nevertheless, the strong rebound on Friday pushed the stock market to end the week with a weekly gain.

A surprisingly weak June non-farm payroll report released earlier this month is seen as a comprehensive boost for the Fed to take action to cut interest rates in September. The unexpected rise in the US unemployment rate to 4.1% indicates that the labor market is cooling at a much faster pace than Fed officials expected, making the labor market a renewed focus for the Fed, which has been focused on inflation data for the past two years.

It is understood that Powell told Congress last week that Fed officials are becoming increasingly vigilant about potential risks in the labor market, while waiting for more evidence of a slowdown in inflation. Powell emphasized in Congress that the Fed has made significant progress in combating inflation and may not need to wait for the inflation rate to drop to 2% before starting to cut interest rates. Powell has been avoiding sending any strong signals on interest rates, but he emphasized that policymakers face the risk of acting too fast or too slow.

From the crucial perspective of the Sam Rule, the 3-month average US unemployment rate has risen by 0.42% from the 12-month low point, getting closer to the threshold of 0.5%. The core of the "Sam Rule" is that when the 3-month average unemployment rate is 0.5 percentage points higher than the 12-month low, it usually indicates that the economy is in a recession. Since the Fed economist Sam proposed the "Sam Rule," the accuracy of this indicator in predicting economic recessions has been 100%. In all 11 US economic recessions since 1950, the "Sam Rule" has been confirmed Economists Sarah House and Michael Pugliese from Wells Fargo recently wrote in a client report, "Overall, all economic data is at its most supportive period for rate cuts this year."

On July 31st, Powell will hold a press conference after the next two-day monetary policy meeting of the Federal Reserve. This event, along with Powell's speech at the Jackson Hole Global Central Bank Economic Symposium at the end of August, will provide ample opportunities for the chairman to reveal whether the Fed may take action in September.

Can the "AI Faith" Trigger Another Wave in the Stock Market and Drive Overall Growth in Tech Stocks?

The performance reports and earnings conference calls of TSMC, the global chip "king of foundries," and ASML, the core semiconductor equipment supplier to TSMC, are crucial for global tech investors' "AI faith."

In particular, the comprehensive performance of TSMC and ASML, as well as the management's comments on chip demand, especially TSMC's management's optimism about NVIDIA's AI chip demand and CoWoS advanced packaging capacity, may once again fully reignite global tech investors' "AI faith" after NVIDIA's unparalleled financial report in May. The belief in AI among tech investors may once again create huge waves in the global stock market.

Boosted by the artificial intelligence boom, TSMC's second-quarter sales exceeded market expectations. Data released by TSMC on Wednesday showed that the company's net revenue in June was NT$207.9 billion, meaning that TSMC's net revenue for the second quarter reached NT$673.5 billion, a 40% year-on-year increase, higher than the market's average expectation of 35.5%.

Therefore, this week the market will focus on TSMC's performance indicators such as earnings per share, operating profit, as well as the management's comments on NVIDIA's AI chip demand and CoWoS advanced packaging capacity. It is reported that industry insiders recently revealed that due to the strong global demand for NVIDIA's upcoming blackwell architecture AI GPU, NVIDIA has significantly increased its AI GPU foundry orders with TSMC by at least 25%.

ASML's management recently forecasted that, benefiting from strong growth in demand for cutting-edge logic chips used in smartphones, PCs, and AI data center equipment, its total revenue target for 2025 is €30 billion to €40 billion, and optimistically predicted that the entire chip industry is already in a recovery cycle. Undoubtedly, with the boost from the AI boom, ASML's EUV dominance will continue. As time goes on, the complexity of semiconductor manufacturing equipment will continue to increase, and ASML's absolute monopoly advantage in EUV technology, essential for advanced chip processes of 3nm and below, may become even greater. TSMC relies on decades of chip manufacturing technology accumulation in the field of chip manufacturing, as well as its long-standing position at the forefront of chip manufacturing technology improvement and innovation (pioneering the FinFET era, leading the 2nm GAA era), with advanced processes and packaging technology that lead global chip manufacturers, and has long dominated the vast majority of global chip foundry orders, especially in 5nm and below advanced process chip foundry orders. Therefore, TSMC's performance report and revenue brought by 5nm and below processes will also be the focus of the market. This data may largely reflect the demand for AI chips based on 5nm processes such as NVIDIA's H100/H200 and AMD Instinct MI300 series.

Currently, TSMC, with its leading 2.5D/3D chiplet advanced packaging in the industry, has taken almost all high-end chip packaging orders for 5nm and below processes in the market, and the advanced packaging capacity is far from meeting the demand. The demand for NVIDIA's H100/H200 is outstripping supply, mainly due to the limited CoWoS packaging capacity of TSMC. According to Wall Street analysts' expectations, starting from the second half of 2024, driven by the demand for NVIDIA's GB200 and AMD's new MI325 series, 3nm and below advanced processes will continue to bring huge revenue contributions to TSMC. The price increase of 3nm and below processes and advanced packaging foundry services from next year onwards will help accelerate revenue growth in 2025 and the following years.

Recently, top Wall Street investment banks have raised TSMC's target stock price significantly, indicating that the rising trend of TSMC, whose market value once exceeded one trillion US dollars, is not stopping. Their core logic lies in the surge in demand for AI chips brought by artificial intelligence, as well as the substantial increase in profit expected in 2025 from the 3nm level process and CoWoS advanced packaging foundry services, which will greatly boost the company's performance and valuation.

A recent report from Macquarie Securities pointed out that TSMC has learned through supply chain visits that most customers have agreed to raise foundry prices to ensure stable supply, which will further drive up TSMC's gross margin. Analysts predict that by 2025, TSMC's gross margin will climb to 55.1%, and is expected to approach sixty percent in 2026, reaching 59.3%.

This price increase may be based on the extremely strong market demand, TSMC's production capacity constraints, and cost considerations. Major TSMC clients such as Apple and NVIDIA have already booked TSMC's 3nm family process capacity on a large scale, and the queue for customer 3nm foundry contracts is expected to continue until 2026.

According to Taiwan's Commercial Times, next year, TSMC's 3nm foundry pricing may increase by more than 5%, while chiplet advanced packaging represented by CoWoS is expected to see an annual price increase of 10%-20%. At the shareholders' meeting on June 4th, the newly appointed Chairman and CEO of TSMC, Wei Zhejia, who is now fully in charge of TSMC, has clearly indicated TSMC's intention to raise prices. Wei Zhejia also revealed at the shareholders' meeting: Currently, almost all AI chips on the market are manufactured by TSMC **

Goldman Sachs analysts expect TSMC's 3nm and 5nm chip manufacturing prices to rise by "single-digit percentages," and have raised their 12-month target price by 19% to 1160 New Taiwan Dollars (with the latest Taiwan stock price around 1040). Goldman analysts, including Bruce Lu, recently wrote in a report: "We now see that with the increasing enthusiasm around artificial intelligence, TSMC's risk-return profile is very attractive." "As artificial intelligence applications continue to expand, we believe TSMC is one of the core beneficiaries." In addition, Goldman Sachs has set a target price of up to $218 for TSMC's ADR (with the latest closing price of TSMC's ADR at $187.35).

In 2023, ChatGPT is popular worldwide, in 2024, Sora's video large model is launched, and in the AI field, NVIDIA's unmatched performance for multiple quarters may indicate that human society will gradually enter the AI era from 2024. As ASML and semiconductor equipment giants like Applied Materials go through what can be called the "golden age" of the PC and smartphone eras, starting from 2024, they may usher in a new "golden age" in the global layout of AI.

Whether it is TSMC's AI chip production capacity or the increase in HBM capacity for major memory chip manufacturers like Micron, Samsung, and SK Hynix, it is inseparable from these semiconductor equipment manufacturers that are crucial to various stages of chip manufacturing, especially lithography machines being the core equipment in chip manufacturing. Therefore, ASML, Applied Materials, and other semiconductor equipment giants hold the "fate of chip manufacturing" in their hands.

ASML from the Netherlands is the world's largest manufacturer of lithography systems, with a reputation for "human technology peak." If chips are the "pearl" of modern human industry, then lithography machines are the tools necessary to produce this "pearl." More importantly, ASML is the only supplier of EUV lithography equipment needed for the most advanced processes in chip manufacturing, such as 3nm, 5nm, and 7nm chips.

An ASML spokesperson revealed in June that ASML will deliver its latest high-NA EUV lithography machine to TSMC, known as the "king of chip manufacturing," by the end of this year. This news directly drove up ASML's stock price at the time. For TSMC, as well as Intel and Samsung Electronics developing 2nm and below node manufacturing technologies, ASML's high-NA EUV lithography machine is crucial.

Compared to the standard EUV lithography machines currently produced by ASML, the main difference lies in the use of a larger numerical aperture. The high-NA EUV technology uses a 0.55 NA lens, achieving an 8nm-level resolution, while standard EUV technology uses a 0.33 NA lens. This new NA technology can print smaller feature sizes on chips, which is crucial for the development of process technologies for 2nm and below chips, and for high-performance AI accelerators like NVIDIA's AI GPUs used in AI training/inference fields, The 2nm and below process is crucial for the enhancement of AI system computing power. Currently, NVIDIA's H100/H200 AI GPUs mainly use TSMC's 4nm process technology. The newly introduced Blackwell architecture AI GPU will adopt TSMC's 3nm process technology, with the potential to shift to TSMC's 2nm or even 1.6nm process in the future.

In a research report, Fuguo Bank stated: "While we still believe that the acceleration of EUV lithography machine orders is only a matter of time (rather than if), we think the market's expectations for the second quarter of 2024 may be more optimistic than before. If orders for the second quarter of 2024 fall below expectations again, we believe that any signs of weakness in ASML's stock will be seen as a buying opportunity by the bulls, as ASML has already established a positive catalyst path for the second half of 2024 amid the surge in demand for AI chips." Fuguo Bank significantly raised ASML's target price for its US stock to $1185 (ASML closed at $1085 last week). Another well-known institution, Susquehanna, recently raised ASML's target price for its US stock from $1200 to $1300